Escalator Clause...love it or hate it? Any horror stories?

Question

What are your thoughts on escalator clauses? I saw in other forum discussions (from years past, nothing too recent) that people have had some success with them. Obviously they make more sense in hot market like right now than during a downturn. Do you like receiving them as a listing agent (or seller)? Do you like using them as a buyer's agent (or buyer)?

My fear has always been that the listing agent will have a friend put in a bogus offer just below the top end of the escalator clause to ensure maximum sale price. Another fear is "showing your cards"; that the listing agent (or seller) will start telling other potential buyers where the top of the escalator is in order to drum up even higher offers. Has anyone ever been burned like this?

If I ever use an escalator clause, I require written proof of the other offer(s); but again, who is to say it isn't fake? Are there better protection measures than this?

Thank you!

Account Closed · Answer

Jeffrey, my first investment purchase was an OOS duplex which I got off the MLS using a realtor. We used an escalation clause. I do not have strong feelings about whether I love or hate them. I don't believe they are used in all states. In my case, it felt like it worked well: I was ready to buy the property up to a certain price (in hindsight it still would have been a good deal at even higher prices). I ended up getting it at my upper price limit (the escalated price). Cynically, I could think that having to pay my upper limit was fishy, but this was in a hot market on a multifamily. Units like the one I bought regularly go under contract the same day, so I have little doubt that the whole transaction unfolded fairly and above board. Really, I am just glad I didn't lose out over $1000.

Thinking about your concerns: I think a lot of that could be alleviated by working with a realtor you trust and have a good rapport with. They'll have a good pulse on the market and advise when an escalation clause makes sense. I tend to think that most realtors wouldn't risk their license and reputation over trying to nudge the price up by the amounts involved in escalation. In my case, I think the asking price was 180k, and I got it for 188k, so it would seem risky to have a side deal to try to squeeze 3% of 8k ($240).

Austin Johnson · Answer

As Chad said, it's a TON of risk for a realtor to scheme behind the scenes over a few hundred dollars extra. My license, my reputation and ability to sell another home > a few hundred bucks.
Think about this too. Most agents don't get the full 3% ($240 extra) some get 80% of the 3%. so $192. some are on teams and get even less! $96 if you're under a broker and on a team. man, I'm not dealing with the headache of a fake offer and all that for $96.

Mason Hickman · Answer

@Jeffrey Kempf

Many agents in our market request escalation clauses are not used. Some sellers who don’t live and breathe real estate (like BP members) struggle with the concept, as well. I, personally, like escalation clauses and have had success. They aren’t, however for every situation. One such scenario is when my buyer is submitting cash against all financed offers. There is a discount to be had for the cash offer and escalation is comparing only one component of the offer package.

I will admit I am always hesitant about submitting and showing our cards by using an escalation but the listing agent is held to an ethical standard and you hope they wouldn’t throw their integrity in the garbage for a few hundred bucks.

Shawn Mcenteer · Answer

Hi @Jeffrey Kempf not really happen much anymore in my market. They were big when I first became an agent about 8 years ago but seem to have been disappearing especially in todays market where highest and best is the norm. Many agent will flat say do not submit escalation clause on there listing. I think at the end of the day its not worth messing around with, if you are willing to go to X just offer that amount being there is a good chance a handful more offers are likely coming in.

Escalator Clause...love it or hate it? Any horror stories?

Escalator Clause...love it or hate it? Any horror stories?

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